Non-Resident Indians to be cautious while submitting the evidences to the Assessing Officer during Tax Scrutiny.

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Unexplained investments of Non-Resident Indians

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Section 69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

ITAT Delhi in the case of Finlay Corporation Ltd. [2003] 86 ITD 626 (Delhi)

Therefore, the issue whether the income of a non-resident is taxable or not is still to be decided with reference to the provisions of section 5(2) and the provisions of section 68 or 69 cannot enlarge the scope of section 5(2). What is not taxable under section 5(2) cannot be taxed under the provisions of section 68 or 69. Undersection 5(2), the income accruing or arising outside India is not taxable unless it is received in India. Similarly, if any income is already received outside India, the same cannot be taxed in India merely on the ground that it is brought in India by way of remittances. If such income is shown in the books of account then it cannot be taxed in India merely because the assessee is unable to prove the source of such entry. Therefore, the same cannot be taxed under section 68 merely on the ground that the assessee fails to prove the genuineness and source of such cash credit. Therefore, the provisions of section 68 or 69 would be applicable in the case of non-resident only with reference to those amounts whose origin of source can be located in India. Therefore, the provisions of section 68 or 69 have limited application in the case of anon-resident

Capital Receipt and not Revenue Receipt of NRI

It therefore naturally follows that if the identity of the non-resident remitter is established and the money has come in through banking channels, it would constitute a capital receipt and ordinarily cannot be treated as deemed income under s. 68 or 69 of the Act. This is clarified by the CBDT circular itself.

Remittances are made by the nonresident holding company

The Tribunal in the cases of Finlay CorporationLtd., Smt. Susila Ramasamy and Saraswati Holding Corpn. Inc. and the import of CBDT circular referred to above. Whenever remittances are made by the nonresident holding company for purchase of shares of its subsidiary in India, the money undoubtedly is capital in the nature and if documents like FIRC etc. are produced, it can safely be stated that the said money came in through banking channels.

In the case of Anil Dhansukhlal v. Income Tax Officer [2025] 170 Taxmann.com 821 the assessee who being a non- resident acquired a property in India in his name with wife as a second name. Nearly all the investments being funded by his wife from her declared sources held in her foreign bank account. Moreover, all the payments have been made by her in the years preceding the relevant assessment in which only a small sum of Rs. 2 odd lacs is paid by her. The assessee husband had no incomes in India he therefore did not file any return in India.

As the sale agreement got registered in the relevant assessment year the assessing officer proposed an addition for the amount of Rs.2,97,63,459/-, being the Fair Market Value of the property purchased by the assessee as unexplained investment. That followed the actual queries and the assessment routine. The Assessing Officer issued notice to first holder of the property being the assessee who filed a return at a total income of Rs.480/- only. Not finding payments being routed through his bank the Assessing Officer made entire addition at Rs.2,97,63,459/- completely ignoring wife’s banks.

The Dispute Resolution Panel also confirmed the addition of Assessing Officer by passing an adverse order.

The Rajkot bench of ITAT taking note of all evidence filed in respect of wife’s banks and sources deleted the addition stating that it was a joint property held with wife so it was desirable to take into account investments made as properly explained by the Assessee from wife’s banks.

CA.Jayshree B.Com., ACA

CA.K.Balamurugan B.Sc, LLB., FCA

Potential Amendments Benefiting NRI Taxpayers

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Potential Amendments Benefiting NRI Taxpayers

Potential Amendments Benefiting NRI Taxpayers

Several areas could be reformed to provide greater convenience and efficiency for Non-Resident Indian (NRI) taxpayers. Below are some key expectations:

  1. TDS on Purchase of Immovable Properties:
    When purchasing immovable property (except agricultural land) from Indian residents, buyers must deduct 1% TDS on the property value and complete the process through Form 26QB. This process is relatively straightforward. However, when the seller is a non-resident, the applicable TDS rate is significantly higher, and buyers must also obtain a TAN (Tax Deduction and Collection Account Number) and file e-TDS returns, adding to the complexity. This creates administrative difficulties for both buyers and sellers. Introducing a simpler process for non-resident sellers, similar to that available for resident sellers, could ease compliance and ensure smoother transactions.
  2. E-filing of Tax Returns:
    The introduction of electronic filing has enhanced the tax return submission process. However, the final step—e-verification—continues to be a hurdle for NRIs. Currently, verification requires either an Aadhaar-based OTP linked to an Indian mobile number or a digital signature certificate (DSC). In cases where these options are unavailable, NRIs must physically submit the ITR-V. Allowing verification through email, overseas mobile numbers, or foreign bank accounts could streamline the process. Additionally, extending the 30-day verification deadline for non-residents would reduce administrative burdens, eliminating the need to track ITR-V submissions or request condonation for delays.
  3. Tax Residency Certificate (TRC) at the Time of Filing Returns:
    NRIs are required to submit a Tax Residency Certificate (TRC) to claim tax treaty benefits and file Form 10F while submitting their returns. However, mismatches between calendar and financial years often make it difficult for NRIs to obtain a TRC at the time of filing, as foreign tax authorities do not issue residency certificates for future periods. Additionally, in some cases, the cost of acquiring a TRC may exceed the refund amount claimed. A more flexible approach, such as permitting the TRC to be submitted upon request by tax authorities, would simplify compliance and facilitate smoother tax refund claims.
  4. Tax Payments and Refunds to Overseas Bank Accounts:
    The current system permits tax payments via net banking, debit cards, NEFT/RTGS, and UPI, but these options are limited to Indian bank accounts. Additionally, NRIs who close their Indian bank accounts after leaving the country may still become eligible for refunds, which can only be credited to a pre-validated Indian bank account. Many NRIs convert their Indian accounts into Non-Resident Ordinary (NRO) accounts, which impose deposit restrictions. Moreover, they must inform banks about expected refunds, a process that is often time-consuming and may delay or prevent the timely receipt of refunds. Allowing direct tax payments and refunds to overseas bank accounts would significantly improve efficiency for NRIs.

Conclusion:

Implementing these reforms would significantly enhance the tax compliance experience for NRIs by reducing procedural difficulties, minimizing delays, and improving efficiency. These changes would not only simplify tax filing but also ensure a more seamless and equitable tax system for non-residents.

A put option was held to be more like a downside protection – A Protection for Shareholders of Private limited Companies

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Put Options under the Companies Act, 2013, and Its Compliances

The Companies Act, 2013 governs the enforceability and regulation of put options in agreements related to shares of companies, including private limited companies in India. This provision, when coupled with relevant rules and regulatory frameworks such as FEMA and SEBI guidelines, ensures the legal validity and compliance of such contracts.

Legal Validity of Put Options

  1. Definition and Concept:
    • A put option is a contractual right granted to a shareholder (e.g., an investor) to sell their shares to another shareholder (e.g., a promoter) at a pre-agreed price or under specified conditions.
    • It offers downside protection or an exit mechanism to the shareholder.
  2. Recognition Under the Companies Act, 2013:
    • Section 10 of the Companies Act recognizes the freedom of shareholders to enter into agreements related to their shares, provided these agreements do not contravene the provisions of the Companies Act or other laws.
    • Put options, being contractual agreements, are enforceable provided:
      • They comply with the Companies Act.
      • They do not amount to an unfair restriction on share transfers.
  3. Historical Context:
    • The Securities Contracts (Regulation) Act, 1956 (SCRA) initially disallowed put and call options on shares as “void.” However, the amendment of the SCRA and SEBI Circular dated October 3, 2013, clarified that such options are valid if they comply with specific conditions.

Compliances for Put Options

  1. Companies Act, 2013:
    • Section 6: The Companies Act overrides any conflicting terms in a shareholders’ agreement unless those terms comply with the Act.
    • Articles of Association (AoA):
      • The AoA must explicitly permit the transfer of shares under a put option.
      • The agreement must align with the AoA to avoid challenges to enforceability.
    • Section 42 (Private Placement):
      • If the shares are being repurchased as part of the put option, the transaction must comply with private placement rules.
  2. Valuation Compliance:
    • The price at which the put option is exercised must adhere to fair market valuation principles to ensure fairness.
    • In cases involving foreign investors, FEMA pricing guidelines apply (see below).
  3. Stamp Duty and Share Transfer:
    • Appropriate stamp duty must be paid on the share transfer under the put option.
    • The share transfer form (Form SH-4) must be executed and filed.

FEMA Compliances (for Foreign Investors)

  1. Pricing Guidelines:
    • The transfer price of shares must comply with FEMA’s fair market value (FMV) principles.
    • A qualified valuer determines the FMV.
  2. Sectoral Caps:
    • Put options must respect sectoral caps under FEMA regulations (e.g., in sectors where FDI restrictions apply).
  3. Timelines for Payment:
    • The payment for shares must comply with FEMA regulations on remittance timelines.

SEBI Guidelines (if applicable)

For companies where SEBI regulations are relevant (e.g., if institutional investors are involved):

  1. October 2013 SEBI Circular:
    • Put and call options are valid if:
      • The exercise of the option is not in contravention of the Companies Act, FEMA, or other laws.
      • The contract specifies the option price or formula for determining it.

Tax Implications

  1. Capital Gains Tax:
    • Any gain arising from the transfer of shares under a put option is subject to capital gains tax as per the Income Tax Act, 1961.
    • The tax rate depends on the holding period of the shares (short-term or long-term).
  2. Transfer Pricing:
    • If the transaction involves related parties, transfer pricing regulations may apply to ensure arm’s-length pricing.

Practical Example:

Scenario:

  • An investor invests ₹5 crore in a private limited company and negotiates a put option to sell their shares back to the promoter at ₹6 crore after three years if the company underperforms.

Compliances:

  1. The agreement specifies the conditions for exercising the put option and aligns with the AoA.
  2. If exercised:
    • A share transfer form (SH-4) is filed.
    • Valuation is obtained to ensure compliance with FEMA/Companies Act pricing guidelines.
    • Capital gains tax is calculated based on the transaction.

Challenges and Risks:

  1. Enforceability:
    • If the agreement conflicts with the AoA or Companies Act provisions, it may be deemed unenforceable.
  2. Liquidity Concerns:
    • The buyer under the put option must have sufficient liquidity to honor the agreement.
  3. Valuation Disputes:
    • Disputes may arise over the FMV of shares, particularly in high-growth or volatile sectors.

Conclusion:

Put options are legally valid under the Companies Act, 2013, provided they are structured and executed in compliance with:

  • Provisions of the Companies Act and Articles of Association.
  • FEMA regulations (if applicable).
  • SEBI guidelines (where relevant). By ensuring proper documentation, valuation, and compliance, put options can effectively serve as risk management tools or exit mechanisms in private limited companies.

Gifting Shares to Non-Residents

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